Q4 2019 Earnings Call
Thank you for holding ladies and gentlemen, your line for the Falcon Minerals conference call. At this time, we are still gather additional participants to ask that you. Please remain in line.
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Good day, ladies and gentlemen, and walk on to the Falcon minerals fourth quarter earnings Conference call. All lines have been placed on the listen only mode and the floor will be opened for your questions and comments following the presentation.
At this time in its my pleasure to turn the floor, but your host for today, Brian I understand the Chief Financial Officer, Sir the floor is yours.
Good morning, everyone. Thank you for joining todays call discuss Falcon minerals fourth quarter 2019 results.
Before we begin I'd like to remind everyone that during this call we will make certain forward looking statements.
Forward looking statements often address our expected future business financial poor performance and financial conditions and also contain words like expects anticipates and similar words or phrases.
Forward looking statements by their nature address matters that are uncertain and are subject to certain risks and uncertainties, which can cause actual results to differ materially from those perjure projected in the forward looking statements.
We discuss these risks and the quarterly report on form 10-Q, and our annual report on form 10-K [noise].
I would also like to caution you not to place undue reliance on these forward looking statements, which reflect management's analysis only as the date here Rob The company undertakes no obligations to publicly update our forward looking statements or to publicly released the real results of any revisions to forward looking statements that may be.
He made to reflect events or circumstances. After the date here I've or reflect the occurring so I don't anticipate events I.
Additionally, in our earnings release, we've provided a reconciliation to the non-GAAP measures, we referred to in our public disclosures such as adjusted EBITDA and pro forma free cash flow with that I'll turn the call over to Falcons, President and Chief Executive Officer, Daniel Harris for his remarks Daniel.
Thanks, Brian welcome everybody and thank you for joining the Falcon Minerals Corporation fourth quarter 2019 earnings call.
I understand our Chief Financial Officer, who you just heard from.
I will give the financial report following my remarks, and we will then take questions.
As anybody you who is familiar with the energy business is very aware our industry is subject to periods of high volatility.
We are in such a period no.
The entire world is now dealing with a serious uncertain and rapidly changing situation with respect to co bit 19, and the resulting impact on economic activity and energy consumption.
Additionally, we are facing supply side issues following the breakdown at OPEC plus late last week.
We are certainly impacted by this bought believed that our top tier acreage the high quality of our operators the strength of our balance sheet and our ability to run our business with no capital expenditures required will enable us to get through this difficult periods.
Exactly.
The human toll of the grown a virus is of course, even more important than the economic consequences and all of us at Falcon wanting to express are concerned and best wishes for all people personally impacted by Cobot 19.
I want to now begin today's discussion by addressing our company's strikes, especially in light of the current energy environment.
All we are in a challenging period for energy generally this is exactly when Falcon minerals should outperform due to the following strengths.
What a strong balance sheet with $42.5 million of debt outstanding at year end.
Q over 90% of our net asset value is in mineral rights with very with the very top operators and those operators Conoco Phillips BP Dab in in E. G are all executing multiyear development plans across our position.
Three significant production growth, which is already online in the first quarter and clear line of sight to even more growth in the second half of 2020.
For high operating margins with no capital expenditures, which generates significant free cash flow.
Finally number fine we have been extremely disciplined with our acquisition strategy, because we know how valuable our base business is and do not want to dilute that great business that great base position with less attractive assets at high valuation.
That discipline has proven to be correct, given the significant falling commodity prices and pull back in activity in other plays.
This very well may afford us opportunities to grow our business in other core areas and much more favorable valuations then have just recently been paid.
Now I'd like to focus on the details of what will drive our business in 2020.
And supports our guidance range of 5300 to fit to 6100 barrels of oil equivalent per day.
Or be a we per day.
January 24, 2020, we provided in investor deck that sets forth all of the drivers of our guidance range, including line of sight wells.
One of our biggest advantage is that Falcon is that our world class operators are dedicated to their multiyear development plans. They have maintained seven rigs on average running across our properties in the fourth quarter. The same is the third quarter of 2019 and that has increased so that they are.
Currently running eight rigs across our position.
Furthermore, we have experienced nearly 100% permit to turn in line conversion ratio overtime.
That means when one of our operators permanent well it is nearly certain they will turn it into white.
The key question is the timing of turning that permit into production.
We have falcon spend a tremendous amount of time analyzing our operators historical timing from each phase of development that is permit spied to drill the total depth and completed and waiting to be turned in line and how long. Each operator is historically taken from each phase to turn wells in line.
Right.
Please note we have provided a subset of this timing information in our investor deck posted last night.
Additionally, we have strong relationships with our operators, who often times provide even further insight into the timing.
Our operators timing from the time they permit until the time, they turn wells into line averages from under 200 days to about 300 days. So when we announced on January 24 hours that we had 3.5 chew net line of sight wells and.
Our guidance was solely based on those wells that implied and included significant conservatism because given the average time to develop buyer operators. It is highly likely even in this environment that we will have additional net wells.
Brought online this year that we're not yet permitted at the time.
As we mentioned in our earnings release, we have already had in 2000 21.20 of the 3.5 to net wells brought online.
Our operators size scale organizational planning and balance sheets is a major strength of ours in should provide clear differentiation relative to other businesses.
Given the 1.0 net wells turned in line in January and February.
We expect in the first quarter of 2020 production grows a greater than 20% from the fourth quarter of 2019.
Our hooks ranch wells came online on February said.
And favorable initial production production has been observed.
Furthermore, given the partial quarter contribution from the hooks ranch wells and the fact, the second quarter of 2020 will benefit from a full period of production. We currently expect the second quarter to remain at similar levels of production to the first quarter.
As exciting as the hubs rate hooks wells coming online is there's even more to come in the second half of 2020.
We noted in our January Investor presentation that we expect 2.01 net wells.
Again that are all line of sight wells to come online in the second half of 2020.
Those net wells include a number of high net revenue interest locations, including a handful of 10% net revenue interest units that have already begun being drilled.
That should drive even further growth in production in the back half of the year.
So even with a broad energy challenges, we are set up for a solid 2020.
Let's now move on to how all of this production growth will translate into free cash flow, while taking into account the current oil price environment.
Using 2020 strip pricing of approximately $35 per barrel.
At the midpoint of our guidance range of 50, 5700 Boe per day, we generate approximately 40 cents a free cash flow per share that said $35 oil.
We generate 40 cents of free cash flow per share or a 14.8% free cash flow yield based on yesterday's trading price.
With respect to the fourth quarter of 2019.
We had 73 gross wells and 0.59 net wells turned in line.
This resulted in production of 4027 Boe per day for the quarter of which approximately 50% was oil for all of 2019 Falcon had 194 gross wells and 1.54 net wells turned in line, which generated full year production of for that.
I was in 861 be up we per day, which also was 50% oil.
Our for your average net wells turned in line has been 2.6, though so although gross activity remained robust in 2019, we had to bad fortune of lower net revenue interest locations developed.
With 3.5 to net wells in our line of sight this year of which 75% have either been turned in line already or have development activity, we expect to be well above the four year average and over double the 2019 net wells turned in line.
Now with respect to our organic acquisition effort.
As I mentioned on last quarters earnings call, we deliberately slowed down our acquisition effort given that cleared downward pressure on oil prices and the time it takes for sellers to adjust their price expectations.
As a result in the third quarter, we did three small acquisitions for a total of approximately $875000 acquiring seven net net acres for about $125000 per net net acre during the fourth quarter.
We made seven acquisitions acquiring 18 net net royalty acres for a total of $1.8 million or $100000 per net net acre.
Now finally, I will briefly address where we are strategically.
Obviously this is a very challenging environment. We are actively looking at all avenues to stabilize and then reinvigorate our stock price.
We remain first and foremost firmly committed to maintaining a strong balance sheet and we'll continue to benefit from our positive cash flow in business.
As always we will be monitoring all aspects of our business and the market on a daily basis and update you as appropriate.
With that I will turn the call over to Brian for the financial report Ryan.
Thanks, Daniel production for the fourth quarter was 4027 Boe per day.
Oil volumes were 50% of total production and 58% total Eagle Ford volumes for the period.
Our assets generated 13.1 million in royalty revenue during the period.
That 13.1 million in revenue Falcon returned approximately 11.6 million back to its shareholders through the form of a quarterly dividend paid on March nine 2020 or shareholders of record on February 25 2020.
Which is inclusive of the amounts paid to non controlling interest.
80% of dividends paid to class a shareholders. During 2019 were classified as non dividend distributions and therefore represent a reduction of basis rather than dividend income.
Falcon generate non dividend distributions due to the company's high payout ratio coupled with the increased depletion that results from the step up in tax basis Falcon minerals interest that occurred as part of the transaction with Royal resources in 2018.
Falcon expects that greater than 50% of dividends paid to class a shareholders. During 2020 will be classified as non dividend distributions in 2020.
Okay.
Alcons non dividend distributions will not constitute taxable dividend income rather they will generally result in a non taxable reduction to the tax basis of shareholders common stock.
The reduced tax basis will increase shareholders' capital gain or decrease their capital loss when they sell their shares.
Our net realized price for oil during the fourth quarter was $55, an 88 cents per barrel, our average realized price for natural gas was $2.34 per Mcf and our NGL realizations averaged $16.86 per barrel.
Realized oil prices tightened quarter over quarter as we saw positive basin differentials compressed during the fourth quarter.
The total cash operating costs were 4.3 million.
Looking at the component pieces add Milan and production taxes were approximately 1.3 million for the quarter. This is inclusive of a point 6 million increase compared to the prior quarter largely due to an increase in AD valorem taxes says to Falcon compared to asked amounts.
This increase was partially offset by a decrease in production taxes tied to lower production.
Marketing and transportation expense was approximately <unk> point 5 million for the quarter.
Cash DNA expense was approximately 2.5 billion for the fourth quarter.
This cash DNA excludes approximately 8.7 million of noncash stock compensation expense recognized in the period.
Increase from prior quarter was due primarily to an increase in professional fees associated with the annual audit.
Adjusted EBITDA for the fourth quarter was $8.9 million Falcons fourth quarter GAAP net income was 2.3 million on a standalone basis, and 4.4 million, including non controlling interests.
GAAP income tax expense was zero for the quarter due to a step up and basis in our assets that Falcon recognized as part of the transaction with Royal resources in 2018.
In fact, our effective tax rate is approximately zero percent for the fourth quarter versus a federal income tax rate of 21%.
We expect to benefit from this increase depletion allowance for at least several years in the future.
At the ended the fourth quarter Falcon add $42.5 million outstanding on its revolving credit facility and $2.5 million of cash on hand, resulting in a total liquidity of approximately $50 million at the end to the fourth quarter, our net debt to LTM EBITDA ratio.
As of the ended the fourth quarter was 0.76 times.
The company paid a fourth quarter dividend.
13, and a half cents per share pro forma free cash flow per share was approximately 10 cents per share for the period.
We define pro forma free cash flow as adjusted EBITDA inclusive of non controlling interests less interest expense and pro forma cash income taxes.
Our estimate for pro forma free cash flow for the fourth quarter 2019 did not include an estimate for pro forma cash taxes Falcons taxable income was minimal due to a decrease in revenue production and associated depletion.
As Daniel mentioned, we currently expect average production average daily net production to be in the range of 5300 6100 via we for the full year 2020, and we expect oil contribution to be approximately 50% to 55% of total production with that I will now turn the call back.
Over to Daniel.
Thanks, Brian.
Jess why don't we open the call up for questions.
Certainly ladies and gentlemen, if you do have a question or comments. Please press star one on your telephone keypad at this time to using a speaker phone, we ask that while posing a question you pick up your handset to provide the best sound quality again at a star one for any questions or comments at this time, we'll go first to Lee Cooperman at Omega family Office.
Yes. Thank you.
It's one make sure I understood.
You said it up.
$35 oil.
The midpoint of your production guidance, you expected dividend 40 cents.
What are you selling it will for currently.
Good morning Lee.
Good morning.
So we received a modest discount to Louisiana light Sweet crude which is a premium to Dolby yutai, it's one of our advantages but that does.
Put as generally with that discount and where LLS trades right about right about where there will be yutai is today. So.
Call that $33, we've certainly obviously average well above that for the first two months of the the first quarter.
Secondly, that's why.
I'm sorry, good art.
Right.
So you clearly in the last quarter pay a dividend in excess of your cash flow the balance sheet.
Starting to move in the wrong direction normally at this price I'd be booster you to buy back stock given the and favorable environment for energy and the uncertainty I would say I would focus on improving the balance sheet.
I would discourage you from paying a distribution in excess cash flow that would focus on reducing your debt.
And keeping liquidity very high it would be my observation.
Thank you Lee I guess, it's not a question, but I'll respond anyways.
And we agree with you Red Falcon.
In maintaining.
A pristine balance sheet with $42.5 million.
In under one times leverage I think were.
Well positioned but we'll continue to improve that.
As we move forward well good luck in thank you for your report.
Thank you Julie.
Well move next to Derrick Whitfield at Stifel.
Okay.
Derek on that.
Yes Hello.
Yes. Your line is open.
Hello can you hear me.
Yep.
All right sorry, guys good morning off.
Regarding your comment on potential the potential addition of line of sight wells for 2020 could you help frame the amount you'd expect to add if operator activity remain static with your comments on page five of the presentation.
Yes.
So our I think most importantly.
Our.
Our guidance is based solely on our line of sight wells of 3.5 too.
Net wells. So so most importantly, everything that we include in our numbers has already been at least permitted in fact as I mentioned, 75% of our line of sight wells have been either turned in line already we're have existing development activity.
Already in the first or second week of March of the year. So we're well on our way to fully moving through that we've had.
We've had additional wells permitted since the January 20 fours.
Release.
Of that and when we will continue to see those but most importantly, we especially given the environment one to remain conservative Enzo basing our forecast off the 3.5 June net wells, yes, looking at production in the second quarter as a stable level relative to.
The first quarter seems pretty clear and then having high end ROI wells, which will lead to high net wells in the second half where there's already development activity on those locations should really further buoy. The second half of the year and I, certainly don't want to be overly optimistic but.
We are positioned.
Pretty well for a solid 2020.
Sure that makes sense it sounds like there could be a little bit of upside in the line of sight forecasts, but.
As my my follow up perhaps for for it for you Daniel regarding your M&A comments on growing minerals outside of your focus area could you elaborate on that comment and share your views on the broader M&A environment. If this period of depressed prices persist for an extended period.
Yes.
I guess I want to say one other thing that really yeah. I. Appreciate you, saying on the previous question that there is upside to that I think most importantly, what we want to get across is that our business at Falcon is different than most other isn't.
This is given we're in the highest returning basin in the U.S. nice to areas that basin with.
Probably the three best operators in the United States from a balance sheet perspective from organizational planning perspective, and one that has demonstrated over long periods of time there prosecution of their plays so when oil prices have periods of volatility like we're currently experience.
Thing we should have.
Continued favorable development across our position, we've even seen that.
Through the 2015 2016 periods with this asset base, but as far as the M&A environment over a prolonged period.
In our background has been in acquisitions and consolidating businesses.
Yeah, we took a very conservative approaches we developed I think a best in class team at Falcon with with a very small group of highly capable individuals at this company.
Who are capable of reviewing and evaluating the best assets in the best basins.
We were very deliberate in not moving to quickly because we felt the uncertainty, especially in 2019 of the M&A landscape of oil landscape, which we thought would then materialized in more favorable pricing coupled with the significant assets that had been.
Accumulated by private equity firms in.
Core basins like.
The Permian.
And so I think I mean, I think we have a very valuable asset.
In.
The karnes trough of Eagle Ford, We also have what I think will prove to be a very valuable.
Structure as a publicly traded minerals business and that may position us over time to be a consolidator of minerals and other core areas.
But.
For now we're going to you as I think Lee was saying focus on our balance sheet focused on returning capital.
And then ultimately reinvigorating our stock price because.
We certainly feel undervalued today, given the strength of our business.
Understood. That's helpful. Thanks for your detailed response.
Thank you Derek.
Well move next to Welles Fitzpatrick at Suntrust.
Hey, good morning.
Good morning Wells.
Oh, you guys had on this a little bit in the prepared comments, but but can you can you go a little bit deeper on your thoughts on permit to spud conversion in this environment. Obviously you have some of the.
The best capitalize operators and the business, but.
Are there any kind of preliminary indications are there any historical case studies in kind of 0.2 as to how resilient those permits might be.
And I.
Well I loved the word Brazilian I was thinking about it. This morning, I had been thinking about it when I had prepared my remarks.
I think I mean, we've we have spent a lot of time on the data analytic side.
Looking back over the last almost 10 years. This this asset base has been together.
And as I mentioned in my prepared remarks, we have seen nearly 100% permit to conversion ratio over time and so.
Our studies indicate whether it's 90% whether it's 95% we see very very high permit to conversion ratio because often titans in most of the time, our operators don't permit a well until they have clear line of sight.
On the rig coming on in so it's simply a function of time from permit to spot and then spied.
To total depth and then total debt to completion and turned in line. So.
I think it's fair to assume that we may see a push out in timing from our.
200 days to from from 200 days to 300 days permitted turned in line but.
It is into about whether we'll be converting those permits it's about the timing of those and with 75% of our net wells already in line or in development. We're in a very strong position to deliver a solid Q.
Yes, I was in.
2000, then 20, even at $35 oil.
Okay. Okay that makes that makes total sense and then.
End of an odd ball one but.
And obviously oil is down but.
Yes, it's down pretty hard to any thoughts the going down dip during.
This this dark season for gap.
You know.
We're going to mind, our own shop right now.
You know I think that type of move is not a bad move or others in makes a lot of sense, but for US right. Now we're we're going to continue to manage expenses down and keep them low we're going to you.
Be very prudent with any acquisitions, if we do any we're going to mind, our balance sheet and I think.
We're going to benefit from development activity of our operators and I think you'll see us rewarded over the short term for that type of activity and then yes, and then we'll be adding proactive in being getting back on track to be a major consolidator minerals.
Perfect Alright makes sense thanks, guys.
Thank you.
Well move next to Jeffrey Campbell of Tuohy Brothers.
Good morning.
Daniel earlier, you provided the suggestion that M&A and other basins might materialize due to the current oil price volatility in the stress it its engendering.
With equity pretty beaten up throughout the NPL minerals space and with your specific priority for.
Balance sheet resilience. So just wondering what sort of acquisition could be viable in 2020.
Yeah, I don't even want to say Hey, Jeff Nice to talk to you I don't want to speculate given the just volatility of the market.
It's not even worth it.
To get you know tomorrow versus today. So we do as a reminder, have a very strong balance sheet.
We are in a very good position.
With respect to I mean every stress case that we we haven't you all can run yeah with respect to our balance sheet. We're just going to continue that strengthen continue to develop benefit from our operators development, but I'm not going to speculate on what may or may not yes, transpire over there.
Coming months in quarters.
So we'll think of that was kind of a high high level comment at this time.
I was wondering can you give us some color on.
In the last and the earlier in the fourth quarter. We were told that there were some high on or I wells.
Were delayed and and their timeline I was just wondering if those things come online and our they're performing up to expectations.
I'm going to what Brian answer question Ryan Please.
So.
Just to give you some color from Q3 to Q4, we had reported 48 25 BOE per day in Q3, a portion of that was a benefit from a prior period adjustment in Q4, we saw a little bit of a base decline as well because of the.
Low net well count turned in line in Q3, then obviously the impact from the offset Fracs that we outlined in January investor presentation, and the timing of the high in IRI wells that we laid out in our January intern investor presentation.
December trajectory has been upward and those are.
Now back.
Operating so.
Okay. So.
The point of the energy, Hi, Inn, or I wells or Theyre performing up to your expectations.
Yes, the high end or I wells are back on line in fact, all of those transitory items.
I have had subsided in its subsided.
As we entered 2020.
Thank you Jeff.
Sure and last quick one is there any further development at hooks ranch anticipated during 2020 at this time.
Not in any of our numbers now okay, great. Thank you.
Thanks, Jeff.
And as a reminder, ladies and gentlemen, it was star one if you had a question or comment we will go next to Gail Nicholson at Stephens.
Hi, good morning, guys.
In regards to guidance you guide just based on the line of sight, while I'm. Just curious how you guys are factoring or thinking about potential reebok opportunity and or you are.
Cross the asset base.
Thank you Gail always nice to John Brian feels the same way.
So.
As a.
We have not factored into any of our numbers re fracs or enhanced oil recovery. We very much have benefited from read that re fracs on our positions.
In including from Conoco Phillips as they develop some of our higher enter I locations.
They have refract I am we've also experienced that from Yohji all of that has upside to our numbers.
And we'd like to yes, just benefit from that upside no overachieve.
I like the over achievement.
The volatility in the commodity price environment, how do you guys that we thought or reconsidered feature hedging strategy at all.
It's a good question.
I thought about it on Saturday and Sunday, but it felt like it might be a little bit.
Most mature.
That is if thats a word.
Yes, it's something we've considered constantly.
We have consistently fell to given our very low operating expense in my first thought low operating expense per barrel.
Providing both.
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The upside as well as the downside is.
It is fair to our shareholders I am certainly at these levels I'm not an advocate to hedge even though prices very well may go lower they probably will go lower our balance sheet is is solid.
Yes.
We obviously have more more than twice is not as much liquidity is we do drawn so we're in fine shape, our operating expenses are low.
We'll generate positive free cash flow.
Of like $10 a barrel. So the answer is yes thought a lot about it no not currently contemplating hedging.
Okay, great. Thank you so much.
Thanks.
Well go next to Jon Evans that SG capital.
Daniel I'm just curious.
Have you guys thought about making any SGN a cuts et cetera. Some of your brother and they're bigger have made some says substantial cuts and I'm just curious.
It doesn't seem you're going to be able to grow besides organically in the near term medium term because of the price of the equity so any thoughts there.
Yes. Thanks appreciate the question John It's always nice to talk to you.
As well and I think Brian shares that yeah. Good so.
The answer is we're very focused on expenses we have.
We have our eye on some very clear administrative type costs that we regardless of commodity prices that we want to prune out.
We are very different from our Brad the written we with respect to our organizational structure.
As a reminder, I had the the.
Responsibility of.
Of reducing staff.
In running in SMB business, hundreds and hundreds of people I as well is cutting gionee and administrative costs.
In building Falcon.
Employee by employee we designed this company and have a total of 11 employees dedicated to this business, which is half of our next closest competitor or pure.
Who is about 20 or 21 and about a quarter of another peer of ours, whose about the same size and I know Blackstone minerals, who is obviously much larger and a significant reduction but they also have a large.
A large our working interest portfolio and had been buying in 48 states I know the folks over there very very good people.
And that's very tough, obviously, but having been through this environment not just in 2014 15, but also eight nine.
And then even back in 2000 2001.
We very very much designed our accompanied you only have people I am really who are doers and be understaffed, but we do have certain administrative costs and for example might down yes. It was pointing out yesterday in our budget in may.
Maybe even our guidance we have an estimated expense for acquisitions and looking at acquisitions legal engineering third party staff et cetera of almost half a million dollars. We're certainly not spending that that's one of the kind of handful of items that we would expect to bring on the G and H.
Right.
Great. Thank you for the answer I appreciate it.
Sure I hope that provides enough color in both you can be sure were we were committed to running as lean as one can possibly long run.
And with no other questions holding I'll turn the conference back to management for any additional are closing comments.
Thank you.
It's nice to speak to everybody during these challenging periods.
We have Falcon wish everybody well, we certainly are are satisfied with our business the strength and stability of our business. How we designed our business to withstand this type of environment and really even be strong through it. So I look forward to speaking to you.
On another day and another period when.
When everybody is doing better.
But in the meantime, Brian myself and we all at Falcon wish everybody well, we're available to the extent anybody would like to speak.
Any further so with that will speak to you soon.
Ladies and gentlemen that will conclude today's call. We thank you for your participation you may disconnect at this time and have a great day.
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